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Federalist Papers Summary No. 35

Alexander Hamilton

The Federalist Papers Summary No 35: Hamilton
January 5, 1788

There are two topics in this paper, what would be the case if the Union could only tax certain objects rather than having an indefinite power of taxation and will the House of Representatives represent all classes of people? The first issue considers the consequences if revenue for the Union was restricted to placing duties on imports. The tendency would be to raise the duties at some point to levels that would injure trade and at these levels consumption would decrease thus decreasing revenue. High levels would also promote smuggling which is prejudicial to fair trade.

Other questions arise, like who pays, the consumer or the merchant and are there inequities between the importing states and manufacturing states. If duties are too high merchants can no longer pass the cost on to consumers which may force the merchants out of business. If the consumer pays the duty there is an unequal tax burden on citizens of importing states relative to manufacturing states. The argument is therefore objects of taxation should not be limited for the Union.

A new objection to the proposed Constitution is introduced, “the House of Representatives is not sufficiently numerous for the reception of all the different classes of citizens; in order to combine the interest and feelings of every part of the community, and to produce a due sympathy between the representative body and its constituents”. The argument rebutting this objection is as follows: there are three types of citizens that will comprise the House, merchants, professionals, and land owners and one or the other will represent all citizens. Merchants will represent the interest of manufacturers and artisans since they rely on each other, professionals will represent the interests of other professionals, and land owners whether they own large or small tracts of land have the same interests. The essential argument is that people know who will best represent them in the House of Representatives.

Before moving too far from the Federal Government’s constitutional power to tax let’s look at the tax issue associated with ObamaCare. Of course constitutional questions will not matter to many of the federal judges deciding the case since many have been chosen because of their bias against the Constitution in favor of activism where if a law is deemed “good” for some reason, it has passed the sole test for Constitutionality. But anyway it is interesting to examine the Constitutional issues.

We get into the tax question with this argument from those in favor of the law, “everyone is going to need healthcare sometime and the government needs revenue to fund it so all citizens have to pay for it by purchasing insurance or through a penalty and this payment being necessary to fund a Government program is therefore a tax”. According to Article 1 Section 8 of the Constitution “The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States”. Clearly healthcare is part of the general welfare so pay up.

But is the penalty for not buying the insurance a tax or something else? An example in the current internet searched literature addresses this. Suppose you drive into a town and get a speeding ticket costing $200, is that a fine or a tax? It depends on the intent of the town in collecting the money from you. If the purpose is to penalize you so that you will not speed again, then it is a fine and not a tax, but if the town wants to collect the money to fund the purchase of say new traffic lights, then it is a tax. Unfortunately for the administration, Obama has already said the penalty is not a tax but instead is intended to penalize you so that you will decide to buy the insurance.

But let’s say that Obama’s statement can be ignored by our activist judges who will gladly declare it is indeed a tax if that supports the principles of those who appointed them. But what kind of tax and does it matter given the broad taxation powers of the Federal Government? Yes it matters for there is one tax excluded explicitly in the Constitution and that is a Capitation Tax. Article 1 Section 9 states “No Capitation, or other direct Tax shall be laid, [unless in Proportion to the Census or enumeration herein before directed to be taken]”. This originally precluded a Federal income tax but that was changed by the Sixteenth Amendment, but the no capitation tax remains unless it is uniformly or proportionally applied to all citizens. A capitation tax is a Federal tax on all persons for just being a person, that is, the person has engaged in no commercial or financial activity but he still has to pay a tax and that is still unconstitutional in our country unless applied uniformly to all citizens. So the penalty for not buying insurance even if declared a tax is a Federal capitation tax on citizens administered non-uniformly and that is unconstitutional if that matters anymore.

If the Constitution is actually considered, the issue will come down to can Congress under the commerce clause regulate a person’s activity and force him to engage in commerce whether that person wants to or not. Can a person’s inactivity be considered engaging in commerce and thus subject to Congressional regulation? Paraphrasing Hamilton from Federalist No. 1, “a wrong election of the part may in this view deserve to be considered as the general misfortune of mankind”. More about this when the papers discuss the intent of the commerce clause.